Microeconomics: A Modern Approach (with InfoApps 2-Semester Printed Access Card) PDF
Preview Microeconomics: A Modern Approach (with InfoApps 2-Semester Printed Access Card)
M ICROECONOMICS A M A O D E R N P P R O A C H FIRST EDITION A S N D R E W C H O T T E R N Y U EW ORK NIVERSITY Microeconomics: AModernApproach ©2009South-Western,apartofCengageLearning AndrewSchotter ALLRIGHTSRESERVED.Nopartofthisworkcoveredbythecopyright hereinmaybereproduced,transmitted,storedorusedinanyformor VP/EditorialDirector: JackW.Calhoun byanymeansgraphic,electronic,ormechanical,includingbutnot limitedtophotocopying,recording,scanning,digitizing,taping,Web Editor-in-Chief:AlexvonRosenberg distribution,informationnetworks,orinformationstorageandretrieval Sr.AcquisitionsEditor: SteveScoble systems,exceptaspermittedunderSection107or108ofthe1976 UnitedStatesCopyrightAct,withoutthepriorwrittenpermissionofthe DevelopmentalEditor:KatieYanos publisher. ExecutiveMarketingManager: BrianJoyner Sr.ContentProjectManager: ColleenA.Farmer Forproductinformationandtechnologyassistance,contactusat CengageLearningAcademicResourceCenter,1-800-423-0563 TechnologyProjectManager: DeepakKumar ManufacturingCoordinator: SandeeMilewski Forpermissiontousematerialfromthistextorproduct, submitallrequestsonlineatwww.cengage.com/permissions ProductionTechnologyAnalyst: EmilyGross Furtherpermissionsquestionscanbeemailedto ProductionService: Newgen [email protected] Sr.ArtDirector: MichelleKunkler CoverandInternalDesigner: JenniferLambert/ LibraryofCongressControlNumber:2007938680 Jen2Design StudentEditionISBN13: 978-0-324-58444-8 CoverImage: ©GettyImages StudentEditionISBN10: 0-324-58444-X Printer: EdwardsBrothers StudentEditionPackageISBN13: 978-0-324-31584-4 StudentEditionPackageISBN10: 0-324-31584-8 South-WesternCengageLearning 5191NatorpBoulevard Mason,OH45040 USA CengageLearningproductsarerepresentedinCanadaby NelsonEducation,Ltd. Foryourcourseandlearningsolutions,visitacademic.cengage.com Purchaseanyofourproductsatyourlocalcollegestoreoratour preferredonlinestorewww.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 11 10 09 08 07 ToAnne Brief Contents Preface xviii AbouttheAuthor xxv Section1 Introduction 1 Chapter1 EconomicsandInsititutions:AShiftofEmphasis 3 Section2 Preferences,Utilities,Demands,andUncertainty 19 Chapter2 ConsumersandTheirPreferences 22 Chapter3 Utilities—IndifferenceCurves 41 Chapter4 DemandandBehaviorinMarkets 64 Chapter5 SomeApplicationsofConsumerDemand, andWelfareAnalysis 93 Chapter6 UncertaintyandtheEmergenceofInsurance 125 Chapter7 Uncertainty—ApplicationsandCriticisms 147 Section3 ProductionandCost 163 Chapter8 TheDiscoveryofProductionandItsTechnology 165 Chapter9 CostandChoice 187 Chapter10 CostCurves 211 Section4 DecisionTheory–StaticandDynamicDecisions 223 Chapter11 GameTheoryandtheToolsofStrategicBusinessAnalysis 225 Chapter12 DecisionMakingOverTime 271 Chapter13 TheInternalOrganizaionoftheFirm 290 Section5 MarketsandMarketStructures 321 Chapter14 PerfectlyCompetitveMarkets:Short-RunAnalysis 323 Chapter15 CompetitiveMarketsintheLongRun 342 Chapter16 MarketInsitutionsandAuctions 358 Chapter17 TheAgeofEntrepreneurship:Monopoly 378 Chapter18 NaturalMonopolyandtheEconomicsofRegulation 414 Chapter19 TheWorldofOligopoly:PreliminariestoSuccessfulEntry 451 Chapter20 MarketEntryandtheEmergenceofPerfectCompetition 493 Section6 Welfare,Exchange,andGeneralEquilibrium 521 Chapter21 TheProblemofExchange 523 Chapter22 GeneralEquilibriumandtheOriginsoftheFree-Marketand InterventionistIdeologies 553 Section7 BreakdownsandMarketFailure 579 Chapter23 MoralHazardandAdverseSelection:InformationalMarket Failures 581 Chapter24 Externalities:TheFreeMarket–InterventionistBattleContinues 607 iv BriefContents v Section8 InputMarketsandtheOriginsofClassStruggle 631 Chapter25 PublicGoods,theConsequencesofStrategicVotingBehavior, andtheRoleofGovernment 633 Chapter26 InputMarketsandtheOriginsofClassConflict 674 AnswerstoSelectedExercisesandProblems 703 Glossary 724 Index 736 Contents Preface xviii AbouttheAuthor xxv SECTION 1 INTRODUCTION 1 1 ECONOMICS AND INSTITUTIONS: A SHIFT OF EMPHASIS 3 MicroeconomicsandInstitutions 3 InstitutionalArrangements:PreordainedorArbitrary? Microeconomics:AToolforUnderstandingInstitutions ConventionalMicroeconomics 5 TheProblemofAllocatingResources AllocationStrategies TheEffectofInstitutionsontheAllocationProcess EconomicInstitutionsDefined 7 TheEmphasisofThisBook 7 EconomicModels 8 MathematicalModels AnalogiesasModels TestingTheories—EconomicsasanExperimentalScience 9 TheModelUsedinThisBookandanOutlineoftheChapters 10 Section2:Preferences,Utilities,Demands,andUncertainty Section3:ProductionandCosts Section4:DecisionTheory—StaticandDynamicDecisions Section5:MarketsandMarketStructures Section6:Welfare,Exchange,andGeneralEquilibrium Section7:BreakdownsandMarketFailure Section8:InputMarketsandtheOriginsofClassStruggle ThreeFundamentalInstitutions 14 TheState PropertyRights EconomicConsultingFirms Conclusion 18 SECTION 2 PREFERENCES, UTILITIES, DEMANDS, AND UNCERTAINTY 19 2 CONSUMERS AND THEIR PREFERENCES 22 TheConsumptionPossibilitySet 22 APrimitiveStateofNature:PeopleandGoods TheConvexityPropertyofConsumptionPossibilitySets vi Contents vii Rationality 25 BinaryRelationshipsamongGoods TheEconomicallyFeasibleSet 27 TimeConstraints IncomeorBudgetConstraints RationalityandChoice 30 TheNeedforUtilityFunctions TheContinuityAssumption TheExistenceofContinuousUtilityFunctions AdditiveandMultiplicativeUtilityFunctions CardinalandOrdinalUtility PsychologicalAssumptions 35 PsychologicalAssumption1:Selfishness PsychologicalAssumption2:Nonsatiation PsychologicalAssumption3:ConvexityofPreferences Conclusion 38 Summary 39 ExercisesandProblems 39 3 UTILITIES—INDIFFERENCE CURVES 41 IndifferenceCurves 42 IndifferenceCurvesDerivedandDefined TheShapeofIndifferenceCurves TheMarginalRateofSubstitution IndifferenceCurvesandTastes OptimalConsumptionBundles 50 CharacteristicsofOptimalBundles RevealedPreference 56 Conclusion 60 Summary 60 ExercisesandProblems 60 4 DEMAND AND BEHAVIOR IN MARKETS 64 IndividualMaximizationandImpersonalMarkets 65 TheProblemofConsumerChoice 66 IncomeExpansionPaths 67 InferiorandSuperiorGoods 70 HomotheticPreferencesandtheCharacteristicsofGoods 72 Price-ConsumptionPaths 72 ChangingRelativePrices DerivingthePrice-ConsumptionPath DemandCurves 74 DemandandUtilityFunctions 75 NonconvexPreferencesandDemand NonstrictlyConvexPreferencesandDemand viii Contents IncomeandSubstitutionEffects 78 TheIncomeEffect TheSubstitutionEffect TheIncomeandSubstitutionEffectsCombined NormalGoodsandDownward-SlopingDemandCurves 81 GiffenGoodsandUpward-SlopingDemandCurves 82 CompensatedandUncompensatedDemandCurves 84 DerivingCompensatedDemandFunctions TheRelationshipofCompensatedandUncompensatedDemandFunctions InferiorandSuperiorGoodsandCompensatedandUncompensated DemandCurves Conclusion 89 Summary 89 AppendixA:TheDemandCurve 89 ExercisesandProblems 91 5 SOME APPLICATIONS OF CONSUMER DEMAND, AND WELFARE ANALYSIS 93 Application1:WorkandLeisure 94 Application2:CrimeandPunishment 95 IncomeandCrime ChangesintheDishonestWage TheParadoxofCrimePrevention MeasuringthePriceSensitivityofDemand 99 Price-ElasticityDemandCurves TheSlutskyEquation 104 PropertiesofDemandFunctions 105 DemandProperty1:PriceandIncomeMultiplication DemandProperty2:OrdinalUtility DemandProperty3:BudgetExhaustion FromIndividualDemandtoMarketDemand 109 ExpenditureFunctions 111 ConsumerSurplus 112 ApproximateVersusExactMeasuresofConsumerSurplus:Compensated VersusUncompensatedDemand MeasuresofConsumerGain 118 ChangesinConsumerSurplus Price-CompensatingVariation Price-CompensatingVariationsandExpenditureFunctions 120 Conclusion 121 Summary 121 AppendixA:TheExpenditureFunction 122 AppendixB:Price-CompensatingVariations 123 ExercisesandProblems 123 Contents ix 6 UNCERTAINTY AND THE EMERGENCE OF INSURANCE 125 UncertaintyandtheNeedforInsurance 126 RepresentingUncertaintybyProbabilityDistributions 126 PropertiesofDistribution TheMeanandVarianceofaRandomVariable DecisionMakingunderConditionsofUncertainty:Maximizing ExpectedUtility 130 WhyNotMaximizeExpectedMonetaryReturns? MaximizingExpectedUtility:CardinalUtility 134 OrdinalandCardinalUtility UtilityFunctionsandAttitudestowardRisk 137 RiskNeutrality RiskAversion RiskPreference TheDesiretoBuyInsurance:RiskAversion 143 Conclusion 145 Summary 145 ExercisesandProblems 145 7 UNCERTAINTY—APPLICATIONS AND CRITICISMS 147 TheCreationofInsuranceandInsuranceMarkets 148 RiskPooling:TheGrowthofInsuranceCompanies 151 HowCouldExpectedUtilityBewrong? 155 ViolationofProbabilityRules WhyUsetheExpectedUtilityTheory? Conclusion 161 Summary 161 ExercisesandProblems 162 SECTION 3 PRODUCTION AND COST 163 8 THE DISCOVERY OF PRODUCTION AND ITS TECHNOLOGY 165 DiscoveringProduction 165 TheDiscoveryofProductionandtheRiseofanEntrepreneur MeasuringOpportunityCost,Investment,andProfits TheProductionFunctionandTechnology 167 TheMarginalRateofTechnicalSubstitution 169 DescribingTechnologies 171 ReturnstoScale ElasticityofSubstitution TimeConstraints 175 TheImmediateRun,theShortRun,andtheLongRun TheRelationshipBetweenTimeConstraintsandtheProductionFunction Conclusion 180 Summary 180
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